Brussels: The consulting practices of the Big Four professional servicesfirms will have less than five years to divest and re-brand themselves, if the EU Commission's audit reform proposals are ratified.
Claire Bury, acting director, Capital and Companies, who introduced the reform package on Wednesday, said that whilst she was reluctant to commit the Commission to a precise timetable, she hoped to see the reforms "implemented and operating in member states over three to five years."
She also confirmed that as well as splitting their audit and consulting businesses, the separated consulting firms would have to change their names.
The new directive would not allow the Big Four consulting arms to be part of the same network as audit, and they would not be able share the same ownership structure, or use the same name. "There will have to be changes of name — so there would be a branding issue", Bury said.
The split of advisory services from audit is one of a series of measures designed to improve the independence of the audit process for Public Interest Entities in Europe (listed companies and financial institutions), to minimize potential conflicts of interest within the big firms and to open up the market.
The package has been driven through by Michel Barnier, the EU internal market commissioner in the face of intense lobbying by PwC, Deloitte, Ernst & Young and KPMG.
Bury offered some clarification of how professional services firms would be affected by the measures.
All audit firms would be prohibited from offering advisory services where there was an obvious conflict of interest, she said. Tax services, general management advice, design of internal control and risk management systems, and actuarial and legal services "would clearly fall into the prohibited category". Conversely, some IT consulting, human resource services and M&A work could be authorized by client audit committees or by the regulator. The criteria would rest on the potential for conflict of interest; anything that threatened to jeopardize the independence of the audit, such as very lucrative consulting contracts with the same client, would be prohibited.
She also laid out the Commission's definition for a Pure Audit firm. "There is a numerical threshold for Pure Audit", she said. Firms that generate more than a third of their annual revenue from PIEs and belong to a network with combined audit revenues of 1.5 billion Euros in the European Union, will be considered large firms, and have to convert to Pure Audit concerns.
"That means the Big Four in most member states, and some second tier firms in some states — yes, it is the Big Four", she admitted.
"These are very significant proposals. They will have an impact on the (Big Four) business model, there is no doubt", she said — but she insisted that the principle of audit independence was paramount.
The Commission's reforms could still be altered by Ministers and the European Parliament before becoming law, and the Big Four firms have all given notice that they will oppose them.
The Big Four response to the reforms is here.